Could Climate Bonds Become a Major Force in Green Finance?

So-called “green” or “climate” bonds, being issued by a number of financial institutions and state governments as a means of generating funding for sustainable development and clean energy technology, are becoming increasingly popular and could become a major new force in the green investment world, according to the Globe-Net.

The World Bank developed the Green Bond concept in 2007/2008 and simplicity is key to its popularity, according to Globe-Net blog post. The World Bank’s green bonds are triple-A rated and can be traded as easily as other “vanilla” investments, offering investors a high rate of liquidity.

More than $3.3 billion worth of the bonds have been issued by the Word Bank since their creation. Over the past 18 months the market for these types of investments has doubled, from $5 billion to $9.5 billion, Globe-Net says.

Last month International Finance Corp issued $1 billion of green bonds that will finance climate-friendly projects in the developing world. The bond offering was oversubscribed and was, according to Globe, “quickly snapped up.” IFC now plans to issue at least $1 billion in green bonds per year, Globe-Net reports.

Last month the European Investment Bank set prices for its first Climate Awareness Bond transaction for 2013 targeted to fixed income investors to support EIB lending for renewable energy and energy efficiency. The state of Massachusetts plans to issue $1.1 billion of binds similar to those issued by the World Bank next month, Globe-Net says.

Such is the growth in interest of such bonds that Globe-Net cites speculation that socially responsible investing could grow from the niche investment technique that it has been for the past few years into a complex array of investments with different risk and reward profiles suited to a much broader set of investors.

In March, the State of New York began warning investors that climate change poses a long-term risk to the state’s financial health, citing Hurricane Sandy and tropical storms Irene and Lee, which caused widespread damage and economic losses.

The decision by New York Gov. Andrew Cuomo’s administration to list climate change as a risk in the state’s bond offerings, alongside warnings about other hazards including unresolved litigation and potential cuts in federal spending, followed Hurricane Sandy, which caused more than $40 billion in damages in the state last year.